Ten to one? Five to one? Actually, it is a lot closer than that. The bookies now rate the chance of Donald Trump being impeached at just 4/6, which means it is more likely to happen as not. Indeed, over at Paddy Power, the real action is betting on the actual case for removing him from office. The smart money seems to have already decided it will happen one day or another, and is now more interested in what the case consists of.

Despite that, the markets keep sailing on upwards as if nothing is happening. The main American indices keep on hitting fresh highs, dragging up equity prices across the world. And yet the historical record tells us that the impeachment of an American president is a traumatic experience for investors, sending equities and currencies on to a wild roller coaster. There is no reason to believe it would be any different this time around.

There are so many issues swirling around Trump, and he came into the White House with so much baggage, that it is hard to see how he can hang in there until 2021. There have been fresh disclosures about his links to Russia during the campaign. He has been engaged in open warfare with the security services and the FBI. His staff are in turmoil, with his press secretary and his chief of staff the latest casualties. American voters might have wanted a change, but it is hard to imagine that this is quite what they had in mind.

Tough process

True, impeachment of a sitting president is very difficult, which explains why none has been successfully removed from office during the last 200 years, despite several attempts. A vote has to be passed by Congress, and with the Republicans still in control of the House there may still be some reluctance to turn on someone who is still nominally a member of their own party.

Still, the bookies probably have it about right. It is more likely than not. To investors, none of that seems to matter in the slightest. Powered by the extraordinary rise of the tech giants such as Amazon and Facebook, the indices have been racing ahead all summer. Last week, the Dow Jones index hit a record high, while the Nasdaq and the S&P 500 hit all-time peaks a week earlier. If there is any bad news out there, investors seem determined to ignore it as they push equity prices higher and higher.

Of course there are plenty of things to worry about, from the Federal Reserve raising interest rates, to a hard crash in China, to a return to protectionism slowing down global trade. But impeachment is surely the big one. And it is certainly not unexpected. So what will be the impact if a trial begins? The historical record suggests we can expect some fireworks.

The most similar case is surely the Watergate scandal of 1974. In February of that year, the House of Representatives appointed a committee to investigate Richard Nixon for “high crimes and misdemeanours”, setting the basis for his removal from office. As the crisis deepened, and tapes from the White House were released, Nixon eventually bowed to the inevitable and resigned.

Market reaction

So how did the market respond to that unfolding saga? According to research by Mark Hulbert’s financial newsletter, between the date of the Watergate break-in and Nixon’s resignation, the S&P 500 dropped a massive 23 per cent. Interestingly, during the first six months of the saga, investors became more and more bullish. They ignored it for a long time, deciding either that it would never actually happen, or it didn’t matter if it did. It was only close to the very end that they suddenly turned dramatically bearish.

How about Bill Clinton? An impeachment action for perjury and obstruction of justice was launched against him in 1998, although it ultimately proved unsuccessful – Clinton was acquitted early in 1999. What happened to the markets that time around? There was a 22 per cent drop between July and October that year – although in fairness, the Russian financial crisis hit at the same time, which contributed just as much to the collapse as anything that was happening in Washington. As he was acquitted, however, stocks rallied and overall the Clinton years saw some of the best stock market returns of any president.

Going back further, the other major example was the impeachment of Lincoln’s successor Andrew Johnson in 1868. Like Clinton, he was acquitted, although only by a single vote on the floor of the House. The stock market was far less developed in those days than it is now. But Wall Street had rallied 10 per cent in the month before the action – they knew how to do volatility properly in those days – and then sank sharply as the trial got under way before recovering again.

Given that, how is the impeachment trade likely to work out in 2017? If it happens, the markets will head into crisis on all-time highs, and largely ignoring the risks, much as they did as Watergate unfolded in late 1973. Just as they were then, the markets will be complacent for a long time, ignoring the risks of Trump being evicted from office.

And then they will suddenly panic when they realise that the world’s largest economy has been plunged into political chaos. And that will be made worse by Trump’s unpredictable responses – some of the tweets as Congress threatens to end his hold on office can only be imagined. He might well lash out by ripping up trade agreements, by firing officials at the Fed, or by launching a military action somewhere to distract attention. Any or all of those moves will only heighten the crisis. The American economy remains the largest in the world, alongside China, and the dollar remains the pre-eminent reserve currency. Turmoil in Washington on that scale could only be ignored for so long.

True, if and when Mike Pence is installed as president, possibly with Jeb Bush as his vice-president, sentiment will recover, and possibly very quickly, just as it did after Nixon resigned. Investors have long since given up on the promises of tax reform and infrastructure spending that fuelled the “Trump rally” after he was elected last year. It is obvious to just about anyone that he has neither the support or the skill to get any legislation passed. Pence is a far more traditional Republican, with a pro-business, low-tax agenda, and the markets will like the look of that. But it is going to be a very rocky ride until then. The impeachment trade has only just started – and when it gets going, we can expect plenty of wild swings in the markets.

All that — and, on occasion, even legally dubious information — is increasingly being trafficked over the new private lines of Wall Street: encrypted messaging services like WhatsApp and Signal.

From traders to bankers and money managers, just about everyone in finance is embracing these apps as an easy, and virtually untraceable, way to circumvent compliance, get around the HR police and keep bosses in the dark. And it’s happening despite the industry’s efforts to crack down on unmonitored communications, according to conversations with employees at more than a dozen of Wall Street’s most recognizable firms.

Just last week, a former Jefferies Group banker was fined in the U.K. for sharing confidential data on WhatsApp.

In many ways, the development reflects a cultural shift. At big banks and small shops alike, rowdy trading desks and the boys-will-be-boys ethos are no longer tolerated, at least publicly. But the widespread use of encrypted apps is also raising a deeper concern: It could enable reckless behavior that’s all but impossible to police and lead to abuses like the chat-room scandals involving Libor manipulation and currency rigging.

“You’re really able to operate outside of the bank,” said William McGovern, a former SEC branch chief and senior lawyer at Morgan Stanley who now works at law firm Kobre & Kim. “We have seen in our investigations that the ground is shifting under everyone, and technology changes are driving a lot of it.”

Rules, regulations

The rules are clear. Financial firms need to keep records of all written business communications, no matter how innocuous, according to the Securities and Exchange Commission and the Financial Industry Regulatory Authority. Asset managers are bound by similar regulations.

AP Photo/Seth Wenig

Representatives for Wall Street banks, including those at Goldman Sachs Group Inc., Bank of America Corp. and Citigroup Inc., say they have various policies in place to prevent unmonitored communications and unauthorized access to confidential information. They routinely check emails and chats on company devices, restrict personal phones and messaging services on trading floors and require employees to sign agreements prohibiting unmonitored communications for work. In January, Deutsche Bank AG banned text messages and apps such as WhatsApp and Apple Inc.’s iMessage on company phones globally to improve compliance standards.

Across finance, the nearly two dozen employees who spoke with Bloomberg say those policies are routinely ignored and the use of personal phones for work is a fact of life. No one would speak on the record for fear of losing their jobs.

When asked about the widespread use of unauthorized apps, SEC spokeswoman Judith Burns declined to comment.

Big brother

A big reason more and more Wall Street types have turned to messaging apps is because they are tired of having every written word — work-related or not — ingested into vast, Big Brother-like databases and scrutinized for tone and taste in ways that strike many as overbearing. They’ve learned even the slightest misinterpretation can land them in hot water — not only with compliance, but with prosecutors on the lookout for financial crimes.

Some clients also prefer those apps to communicate. Ignoring those messages would be bad for business (not to mention how awkward it can be to try and steer conversations back onto monitored systems). Many clients are friends, and vice versa.

If you look the other way on this, it’s only going to get worse

Financial firms have long grappled with new technologies — think email, chat rooms or instant messaging software like BlackBerry’s “BBM” — and how to balance the privacy of their employees with the need to comply with securities laws. (Bloomberg’s message and IB chat services enable firms to set up alerts and restrictions to help enforce compliance.) But in this perennial cat-and-mouse game, it’s gotten harder for compliance to keep up.

Popular texting apps, like iMessage, already route conversations around most systems that financial firms use to monitor emails and chats. The proliferation of “end-to-end” encryption services, which can automatically delete messages as soon as they are read, like Mark Cuban’s Dust, Confide and Signal (which is recommended by the likes of Edward Snowden and others worried about government surveillance), makes things even harder. Foreign-language apps like China’s WeChat pose an added language problem for compliance monitors.

‘Always behind’

“They’re always behind,” said Jack Rader, a managing director at ACA Compliance Group, which sets up monitoring systems for financial services companies to flag potential regulatory problems. “It’s almost impossible for a compliance department within buyside or sellside firms to stay ahead of communications technology that is available for employees.”

How encrypted messaging is used varies widely on Wall Street.

AP Photo/Mark Lennihan, File

At the big banks, employees will often use such apps to share gossip, tell clients during morning sales meetings what they’re looking to buy and sell (often within sight of their bosses) or even boast about a particularly profitable trade, the people said. A “don’t ask, don’t tell” mindset prevails.

After betting big on Brexit, junk-bond traders at one of Wall Street’s largest banks crowed about plans for a blowout celebration in a large WhatsApp chat group that included friends from rival firms.

Others say the apps are crucial because they’re faster and more convenient than the monitored software their own firms provide.

Sensitive matters

Several employees at one multibillion-dollar hedge fund set up a WhatsApp group chat to regularly exchange market intelligence with one another, according to a person with direct knowledge of the matter. It’s particularly useful if there is a big market move and for money managers traveling to far-flung places who need to be reachable at a moment’s notice.

For more sensitive matters, they turn to Signal. The app can be set to delete messages — from both the sender and receiver — in as little as five seconds.

Occasionally, the use of personal phones has enabled conduct that would be construed as legally problematic, compliance experts say. At least one investment bank has debt salesmen who routinely send screenshots of chats showing one hedge fund’s positions to another client to win more orders, a person with direct knowledge of the matter said.

“If you look the other way on this, it’s only going to get worse,” said Warren Small, who teaches a program at Middlebury Institute of International Studies for students seeking careers investigating financial crimes, including with the FBI and the Department of Justice. “With financial transactions, temptations and the rewards are just too great.”

WhatsApp boasting

On Thursday, U.K. regulators said they fined Christopher Niehaus, who worked at Jefferies, about US$46,000 for sharing confidential client information via WhatsApp while boasting to a personal acquaintance and a friend. The messages came to light after an unrelated complaint led him to voluntarily hand over his phone to Jefferies, a person with knowledge of the situation said. (Jefferies spokesman Richard Khaleel and Niehaus’s attorney declined to comment.)

While the authorities said none of the parties in the Jefferies incident traded on the information, it’s not hard to see how things could get worse.

Are the firms really doing what’s reasonable in trying to stop this?” he mused. “Or are they sort of wink-winking?

In December, Navnoor Kang, a money manager responsible for US$50 billion of New York state’s pension fund investments, was indicted for accepting at least US$180,000 of bribes from two bond salesmen, including a US$17,400 watch, prostitutes and cocaine, in return for business that generated millions in commissions. According to the indictment, Kang and one of the salesmen, Gregg Schonhorn, used WhatsApp “in an effort to keep their communications from being monitored by law enforcement.”

Mark Geragos, an attorney for Kang, who pleaded not guilty in January, said in an email that the WhatsApp messages were “benign.” Spokesmen for FTN Financial, Schonhorn’s former firm, and the U.S. Attorney’s office, declined to comment. Schonhorn, who pleaded guilty and is cooperating with the government, didn’t respond to a request for comment.

Telltale signs

To some Wall Street types, the big surprise wasn’t just the alleged crime, but that they didn’t delete the incriminating WhatsApp messages. If they had, compliance experts say authorities would have less to go on because WhatsApp itself doesn’t store users’ encrypted messages.

Plus, for the most sensitive conversations, employees say they still prefer calling on mobile phones they know aren’t monitored, even though there’s a remote possibility those records could be subpoenaed. Investment banks regularly monitor only certain trading-floor lines, and at least until 2018, financial firms generally aren’t required to record employees’ calls.

Regardless, firms are getting better at spotting the telltale signs when an employee wants to go rogue, Rader says. Because so many traders and salesmen rely on persistent chats to talk with clients, banks have taken a page from prosecutors and implemented software to immediately flag phrases like “check your phone,” “sent you a text,” “take this offline” or “call my cell.” Some are set up to find the names of specific messaging programs.

While programs designed to detect unwanted behaviour will keep improving, technology can only go so far in keeping Wall Street firms on the right side of the law. When Rader talks to them about compliance, he sometimes encounters pushback from the heads of sales and trading desks, especially because profits are at stake. That raises a whole host of thorny questions, according to Erik Gordon, a professor at the University of Michigan’s Ross School of Business.

“Are the firms really doing what’s reasonable in trying to stop this?” he mused. “Or are they sort of wink-winking?”

]]>http://business.financialpost.com/technology/personal-tech/wall-streets-whatsapp-problem-illegal-texting-through-encrypted-messaging-is-out-of-control/wcm/a45f89c7-32f0-4eba-a391-2de4719252c9/feed0whatsappBloomberg NewsIf you mark this bull from its breakout to new highs then it’s still just a babe in armshttp://business.financialpost.com/investing/global-investor/bull-market-isnt-as-old-as-some-seem-to-think/wcm/ac865c0d-8b29-4858-b185-57a0d9b73375
Fri, 10 Mar 2017 19:19:24 +0000https://financialpostcom.wordpress.com?p=743644&preview_id=743644]]>To committed readers of the financial press, it was almost impossible to miss the proclamations that a milestone had been passed: The bull market, as of March 9, was eight years old.

This formulation is wrong, since it misconstrues the definition of a bull market. Rather than saying that the bull market is celebrating its eighth birthday, what we really are observing is the eighth anniversary of the bear-market lows.

The age of a bull market has important ramifications. Understanding if we are in the second, third, fourth or eighth year of a market cycle is a pretty big deal. The age of a bull isn’t about picayune definitions; nor is it a rationalization for a pricey stock market. Rather, this is an attempt to provide some precision, accuracy and clarity as a counterpoint to lazy market commentary.

With that insufferable preamble out of the way, let’s move on to a different, but intriguing question: How long was the 1982-2000 bull market?

Warning: This is a trick question.

The obvious answer is 18 years — at least that’s the answer I would give. But as you heard throughout your high school math classes, the answer isn’t all that matters — it’s how you got to it. “Show your work” was exhorted on every calculus exam you took. It applies here as well.

My position on market cycles is as follows: Secular bull markets — versus cyclical rallies and sell-offs — begin when indexes surpass earlier highs. Thus, in 1982, when the Dow Jones Industrial Average eclipsed 1,000 on a permanent basis, is when we mark the beginning of that epic 18-year bull market.

Why is this important? Understanding how old a bull market is may very likely affect your expectations of future returns, your risk appetite, even your investment allocations. Misunderstanding when a bull market began is potentially a very expensive error to make.

Charlie Munger exhorts constantly to “Invert, always invert.” Let’s follow his advice and see what happens if we agree with the suggestion that the bull market is eight years old.

If you do that, though, you must make similar assumptions about other bull markets of the past century. Consider what this does to the historical examples.

It means that the 1982-2000 bull market actually lasted 27 years, starting with the 1973 bear-market bottom. If you speak to people who were working on Wall Street in the 1970s, none of them will tell you that period felt like bull market — because it wasn’t. But that’s the date you need to use to be consistent with those who say this bull market is eight years old.

Now, almost everyone knows that earlier bull market didn’t last that long.

Let’s look at another historical example: the secular bull market that tracked the postwar period from 1946 to 1966. How long was that bull market? Obviously, the answer is 20 years. But if you apply the same reasoning that leads someone to say today’s bull market is eight years old, then that rally would have lasted 34 years, perversely beginning in 1932. Again, I don’t think anyone who lived through the Great Depression would say that it coincided with a bull market.

So let’s be consistent. As I wrote in February 2013, a breakout to new highs would mark the end of the bear market, and the beginning of a new bull market. That seems to have occurred and that is the more appropriate start date for this bull market. In other words, this bull market looks like it’s four years old.

Definitions matter. There is a big difference between cyclical bull markets, bear market rallies and corrections within a secular bull market. Understanding this can make all the difference in the world.

]]>bullmarket_gtty3fpblWhoops: Goldman Sachs economists are starting to worry about President Trumphttp://business.financialpost.com/news/economy/whoops-goldman-sachs-economists-are-starting-to-worry-about-president-trump/wcm/d507b561-152e-480a-8337-864f0782598f
http://business.financialpost.com/news/economy/whoops-goldman-sachs-economists-are-starting-to-worry-about-president-trump/wcm/d507b561-152e-480a-8337-864f0782598f#respondTue, 07 Feb 2017 14:34:38 +0000https://financialpostcom.wordpress.com?p=735017&preview_id=735017]]>wA rethink, if not an outright reversal? Just a few weeks ago, Wall Street analysts were busy boosting their economic forecasts on the expectation that President Trump would implement sweeping corporate-tax reform, a rollback of regulations, and new fiscal stimulus. Two weeks into his term and the president has been focused primarily on immigration and trade, causing a reevaluation among analysts at some banks that harks back to pre-election concerns about Trump’s uncertain effect on markets and U.S. economic growth. “Following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration,” Goldman Sachs Group Inc. economists led by Alec Phillips wrote in note published late last week. “One month into the year, the balance of risks is somewhat less positive in our view.” Goldman’s Phillips cites three key reasons for the more cautious tone.

1. Obamacare struggle is a sign of things to come

Republicans’ uphill efforts when it comes to replacing the Affordable Care Act may prove to be the norm rather than exception. For investors expecting that the Republican-controlled Congress would be able to push through a sweeping agenda including tax reform and fiscal stimulus, this may prove disappointing. “The recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story,” said Phillips.

2. Polarization of political parties is getting worse

Trump’s executive order barring nationals from seven predominately Muslim countries sparked a backlash in Washington and has done little to heal the rift between Republicans and Democrats, making the prospect of cross-party cooperation even more remote. “While bipartisan cooperation looked possible on some issues following the election, the political environment appears to be as polarized as ever, suggesting that many issues that require bipartisan support are likely to face substantial obstacles,” Phillips said. “While we have not expected a sweeping overhaul of regulation in any of these areas to become law, recent developments lower the probability somewhat that even incremental changes could pass in the Senate.”

3. There’s a real possibility of market disruption

Trump’s focus on immigration and trade may prove more than disappointing for Wall Street and Corporate America; it could prove downright disruptive.

“Some of the recent administrative actions by the Trump Administration serve as a reminder that the president is likely to follow through on campaign promises on trade and immigration, some of which could be disruptive for financial markets and the real economy,” Phillips concluded.

]]>http://business.financialpost.com/news/economy/whoops-goldman-sachs-economists-are-starting-to-worry-about-president-trump/wcm/d507b561-152e-480a-8337-864f0782598f/feed0afp_l53fzBloomberg NewsBank watchers hope to gauge potential for ‘Trump effect’ as U.S. earnings season beginhttp://business.financialpost.com/news/fp-street/bank-watchers-hope-to-gauge-potential-for-trump-effect-as-u-s-earnings-season-begin/wcm/e47fe025-4c4c-41e0-a0c5-e9ae36f810a1
http://business.financialpost.com/news/fp-street/bank-watchers-hope-to-gauge-potential-for-trump-effect-as-u-s-earnings-season-begin/wcm/e47fe025-4c4c-41e0-a0c5-e9ae36f810a1#respondThu, 12 Jan 2017 23:23:36 +0000http://business.financialpost.com/?p=728674]]>U.S. banks will begin rolling out their latest earnings reports Friday amid soaring expectations for the sector, which many believe is poised to thrive under the incoming Trump administration’s low-tax and anti-regulation policies.

Though it’s too soon to see any ‘Trump effect’ reflected directly in the banks’ financial results, industry watchers in Canada will be trying to glean how the banks themselves see things playing out during the upcoming quarters, and what that could mean for Canada’s biggest financial institutions.

“Specifically, regarding the U.S. election, commentary surrounding corporate tax-rate reductions, amendments/repealing of banking regulations and macroeconomic conditions are expected to be the focus,” Mario Mendonca, a bank analyst at TD Securities Inc. in Toronto, said in a note to clients this week.

The fourth quarter for U.S. banks such as Bank of America Corp., JP Morgan Chase & Co., and Wells Fargo & Co, reflects the performance in two of the three months that make up Canadian banks’ fiscal first quarter, so analysts often look to U.S. bank earnings season to try to assess how the performance will translate into the bottom lines of Canadian banks.

This is particularly the case for Canadian banks with substantial operations in the United States, including Bank of Montreal, Toronto-Dominion Bank, and Royal Bank of Canada.

The most overlap tends to occur in capital markets, where events like Brexit and the U.S. election have provided a recent boost to trading.

“Although what happens in the U.S. does not always translate to Canada, a more positive commentary from Wall Street in Q4 will help boost already rising expectations for the Canadian banks’ capital markets revenues in fiscal 2017,” said Meny Grauman, a bank analyst at Cormark Securities Inc. in Toronto.

This week, the analyst will also be looking for U.S. bank executives to provide “a better sense of how they believe that rising rates, and more generally the Trump presidency … will likely impact their earnings streams” in the form of lower corporate taxes and reduced regulation.

The potential of the Trump presidency has not been lost on the chief executives of Canada’s big banks, some of whom indicated at a conference this week that the administration could be good for their U.S. operations.

STAN HONDA/AFP/Getty Images

“When the sentiment turns, it is going to be helpful for us,” TD chief executive Bharat Masrani told investors at the RBC Capital Markets Canadian Bank CEO Conference in Toronto.

Royal Bank of Canada chief executive Dave McKay said he expects a “stronger growth agenda” in the U.S.

“That would potentially lead to higher interest rates, which is very good for our franchise in the United States,” McKay said.

As the big U.S. banks roll out their latest financial results in the coming days, they are also expected to shed light on loan-growth rates, which TD’s Mendonca sees as particularly relevant to TD and Bank of Montreal because of their U.S. retail franchises.

“We continue to expect Canadian and U.S. C&I (commercial and industrial) loan growth … to partially offset the slowdown in Canadian domestic consumer lending,” the analyst wrote in the note to clients this week.

When the sentiment turns, it is going to be helpful for us

While Canadian banks with substantial operations south of the border are poised to also reap the benefits from Trump’s planned reforms if they come to fruition, the gains are not going to be seen right away. Trump doesn’t officially take office until Jan. 20.

What’s more, sector watchers say the potential earnings bump is likely to be tempered by the highly competitive banking sector in the U.S.

In Canada, where the six largest banks are dominant in most segments, competitive forces are more limited. Around the edges, credit unions and mono-line lenders compete in segments such as mortgage loans and credit cards, and newer online fintech firms are nipping at the fringes of the core retail franchises of the Big Six banks.

By contrast, the U.S. industry is crowded with large players, as well as hundreds of mid-sized regional banks that are hardly household names in Canada.

“The prospect of improved bank earnings in the U.S. due to lower tax rates, rising interest rates and reduced regulatory burden will over time — if it materializes — benefit the credit profiles of Canadian banks operating there,” said David Beattie, senior vice-president in the financial institutions group at Moody’s Investors Service. “But these potential earnings benefits will be dampened by the very competitive nature of the U.S. regional banking market.”

Despite the fierce competition, mid-sized regional banks have been on a tear since Trump was elected in November, with shares climbing in double digits.

The KBW Index, which is a benchmark for the U.S. banking sector reflecting 24 major bank stocks, soared 22.5 per cent between election day on Nov. 8 and the end of 2016.

Financial Post

]]>http://business.financialpost.com/news/fp-street/bank-watchers-hope-to-gauge-potential-for-trump-effect-as-u-s-earnings-season-begin/wcm/e47fe025-4c4c-41e0-a0c5-e9ae36f810a1/feed0Wall_StreetbshecterSTAN HONDA/AFP/Getty ImagesThe end of the bull market is nigh warn Bank of America analystshttp://business.financialpost.com/news/economy/the-end-of-the-bull-market-is-nigh-warn-bank-of-america-analysts/wcm/ac9b3142-f890-4252-8f17-03e49c072b47
Fri, 02 Dec 2016 19:34:40 +0000https://financialpostcom.wordpress.com?p=719045&preview_id=719045]]>Time could be running out for U.S. equities.

Stocks have continued to hit new highs this year despite concerns over global growth, geopolitical events, and an earnings recession. That dissonance may be coming to an end as analysts at Bank of America Corp. predict we are approaching the market’s last hurrah. The crux of the argument is that the firm’s contrarian sell side indicator, which measures Wall Street’s bullishness on equities, jumped to a six-month high in November, its biggest gain in more than a year. Right now, the index is pointing toward a rally of almost 20 percent for U.S. stocks over the next 12-months, but the analysts believe that a rally of that magnitude could mark the end of the bull run.

“[T]he post-election bounce in Wall Street sentiment could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle,” a team led by Savita Subramanian, head of U.S. equity and quantitative strategy at the firm, wrote in a note Thursday.

“The Sell Side Indicator does not catch every rally or decline in the stock market, but the indicator has historically had some predictive capability with respect to subsequent 12-month S&P 500 total returns,” the bank said.

Bank of America analysts currently have a base case call for the S&P 500 to end 2017 at 2,300, or 5 percent above today’s levels. With this indicator taken into consideration when formulating their outlook, the team’s bull case scenario represents a rapid rise in stocks. “The case for a traditional euphoria-driven end-of-bull-market rally is easy to argue for, and 20 percent or greater annual returns are the historic norm, putting the S&P 500 at 2,700 in our bull case,” they conclude, adding that their bear case calls for stocks to end the year down 27 percent at 1,600. –With assistance from Oliver Renick in New York.

]]>Traders At The NYSE As U.S. Stocks Rally to Halt Five-Day LossBloomberg NewsWall Street takes a post-election breather as investors brace for higher interest rateshttp://business.financialpost.com/investing/market-moves/wall-street-takes-a-post-election-breather-as-investors-brace-for-higher-interest-rates/wcm/dac7e56f-f1db-4cfa-b97d-3d7a5c9b0cbd
Wed, 16 Nov 2016 16:31:37 +0000https://financialpostcom.wordpress.com?p=713874&preview_id=713874]]>Wall Street opened lower on Wednesday — a day after the Dow closed higher for the seventh session in a row following Donald Trump’s election win — as investors braced for higher interest rates.

That prospect has given rise to expectations that the Federal Reserve would raise interest rates faster than anticipated, boosting the dollar index to a 14-year high.

A higher dollar hurts the overseas income of multinational companies.

“We had a pretty sharp rally off the election and it was pretty impressive, but it seems pretty clear to me that sort of emotional reaction, if you will, is now long off,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Tex.

“At this point we kind of have to get back to the fundamentals, and we could very well be in just a sort of wait-and-see mode until we get to the Fed meeting.”

The Fed will hike rates in December barring any major shocks, policymaker James Bullard said, adding that a single rate increase may be enough to move monetary policy to a “neutral setting.”

Traders are pricing in a 90.6 per cent chance that the central bank will raise rates next month, according to CME Group’s FedWatch tool.

The Dow Jones Industrial Average fell 49.78 points, or 0.26 per cent, to 18,873.28. The S&P 500 lost 5.42 points, or 0.25 per cent, to 2,174.97. The Nasdaq Composite dropped 21.18 points, or 0.4 per cent, to 5,254.44. In Toronto, the S&P/TSX Composite index was down 49.21 points, or 0,33%, at 14706.89.

The S&P has gained 1.9 per cent since the election on Nov. 8. The Dow has risen 3.2 per cent and closed at a record high for the past four days.

However, investors are also waiting for more clarity regarding Trump’s policies and what campaign promises will materialize into policies as well as keeping an eye on key appointments to his administration.

Also denting sentiment was a more-than-one-percent drop in oil prices a day after one of its biggest rallies this year, as industry data showed U.S. crude stocks rose beyond expectations last week to add to an oversupplied market.

]]>Financial-Markets-Wall-Street.jpgReutersAfter president-elect Donald Trump’s surprise election victory, CEOs in the U.S. seek unity for staff, customershttp://business.financialpost.com/executive/c-suite/after-president-elect-donald-trumps-surprise-election-victory-ceos-in-the-u-s-seek-unity-for-staff-customers/wcm/d92b26a0-1dcd-4f59-b040-53f225546d8d
Tue, 15 Nov 2016 21:20:48 +0000https://financialpostcom.wordpress.com?p=713637&preview_id=713637]]>NEW YORK — Apple CEO Tim Cook is telling his employees to “keep moving forward.” Facebook CEO Mark Zuckerberg is saying “progress does not move in a straight line.” T-Mobile’s CEO John Legere tweeted “let’s see what an out of the box, non-typical, non-politician can do for America!”

CEOs of major companies are taking stands about the results of the election — a departure from the traditional model of not mixing politics with business that major brands have long espoused.

Some are using it as an opportunity to bring their employees together following a divisive election campaign. Others are using it as an opportunity to stress their companies’ values and mission, or an opportunity to make nice with Trump, who many CEOs were publicly against during the campaign.

The men and women who head the nation’s biggest companies know that having a hostile relationship with the Trump administration could make doing business difficult. They also know that they operate in liberal bastions like New York and San Francisco just as much as in Trump-leaning places like Fort Wayne, Indiana, or Charleston, West Virginia.

“Neutral is the best policy,” says John Challenger, CEO of workplace consultant Challenger, Gray & Christmas.

T-Mobile’s Legere, who long was vocally opposed to Trump, congratulated the president-elect on Twitter for his victory last week, while holding off on judging the president-elect’s policies. Meanwhile another telecommunications executive, Sprint CEO Marcelo Claure, himself an immigrant and personally opposed to Trump, sent an email to employees saying that “it’s our obligation to accept the will of our fellow Americans and respect the new leader.”

It’s possible that Legere and Claure made nice because the president appoints the chairman and commissioners of the Federal Communications Commission, an agency that holds enormous influence over the telecommunications industry. All five FCC commissioners will see their terms expire during Trump’s first term.

Automakers

CEOs of automakers, including Ford’s Mark Fields, have also struck a conciliatory tone, partly because Trump has called for the repeal or renegotiation of the North American Free Trade Agreement, which has allowed the automakers to set up shop in Mexico tariff-free.

Many CEOs publicly expressed hope that the tensions dividing the country will diminish, and that American consumers will set aside their fears and get back to what they do best: shop.

“We are hoping that in the post-election we are just going to see people ready to spend,” said Marvin Ellison, CEO of JCPenney.

CEOs and companies that try to bring people together are “going to be the winners,” says Dr. Larry Chiagouris, a marketing professor at Pace University’s Lubin School of Business. “That always works better from a brand perspective,” he says.

Wall Street, which donated heavily to Hillary Clinton, also now faces an administration that could provide both profit and peril.

Dodd-Frank

Trump has said he wants to roll back some of the regulations in the Dodd-Frank law that was passed after the financial crisis, a move that would benefit big Wall Street banks. But the Republican Party’s platform also contains a provision calling for the return of the Glass-Steagall Act, a Great Depression-era law that broke up big banks.

There’s talk of a massive, US$1 trillion infrastructure program that could rely on tax credits to private funding sources. Many of those programs will require Wall Street’s army of investment bankers and lawyers to help underwrite and finance.

“The president-elect’s commitment to infrastructure spending, government reform and tax reform — among other things — will be good for growth and, therefore, will be good for our clients and for our firm,” said Goldman Sachs CEO Lloyd Blankfein, according to a transcript of a voicemail he sent companywide.

In an email to his employees, JPMorgan Chase CEO Jamie Dimon said the election of Trump shows “the frustration that so many people have with the lack of economic opportunity and the challenges they face.”

Trump’s victory drew a range of responses from CEOs in Silicon Valley, where popular sentiment had tilted strongly against Trump because of his statements on immigrants, women, overseas manufacturing and the use of encryption in consumer products like Apple’s iPhones.

In a post-election email to employees, Apple CEO Cook didn’t mention Trump by name but acknowledged that many people had strong feelings about the outcome of the vote. Cook had let it be known during the campaign that he didn’t support Trump, although he generally avoided taking a public stance on the candidates. In his email, Cook said Apple would continue to support diversity.

While there is discussion today about uncertainties ahead, you can be confident that Apple’s North Star hasn’t changed

Cook didn’t mention encryption, which he has previously argued is essential to protect consumers’ privacy. But he added: “While there is discussion today about uncertainties ahead, you can be confident that Apple’s North Star hasn’t changed.”

Microsoft’s chief executive was more conciliatory. In a post on LinkedIn, the social networking site that Microsoft is buying, Satya Nadella wrote: “We congratulate the president-elect, and look forward to working with all those elected yesterday.” But Nadella added that Microsoft is committed to “fostering a diverse and inclusive culture.”

Facebook’s Zuckerberg, who had previously criticized Trump’s call for building a wall on the Mexican border, sounded subdued in a post on his own social network.

‘Bigger than any presidency’

“I thought about all the work ahead of us to create the world we want for our children,” he wrote. “This work is bigger than any presidency and progress does not move in a straight line.”

The most combative response came from the CEO at Grubhub, an online food delivery service based in Chicago. Matt Maloney said in an email to employees that he rejects Trump’s “nationalist, anti-immigrant and hateful politics,” adding that anyone who disagrees should immediately resign “because you have no place here.”

Maloney later backtracked in a tweet that said “Grubhub does not tolerate hate and we are proud of all our employees — even those who voted for Trump.”

Other companies have taken the election and its aftermath as a marketing opportunity, most notably airlines. British Airways ran ads on Facebook urging people to visit London, using the tag line “had enough of this house?” under a photo of the White House. Air New Zealand ran ads on Instagram and elsewhere highlighting the results of the election and inviting people to visit New Zealand. Spirit Airlines promoted a 75 per cent off sale for flights to Canada.

During the campaign, a group of bankers from around the country — plane tickets in hand — were looking forward to meeting the candidate in the flesh at Trump Tower in midtown Manhattan. They were going to get a chance to hear from his own mouth what he’d like to do with their industry. But at the last minute, Trump canceled and decided to spend his time elsewhere, so they never got the chance.

They weren’t alone. Trump, the apparent president-elect, didn’t spend much time on the campaign trail discussing banks — not nearly as much as Hillary Clinton did in her primary battle with Bernie Sanders. For Wall Street, which loathes unpredictability, Trump is an absolute wild card.

One thing is clear: Traders are nervous about Trump. In anticipation of his victory, U.S. stock futures fell as much as 5 per cent and yields on 10-year Treasuries surged the most since Britain voted in June to leave the European Union. Market turmoil eased as news of his win set in.

A Trump White House was an outcome that bankers were never able to game out. Who will he tap to helm the Treasury Department? Will he follow through on his pledge to try to replace Federal Reserve Chair Janet Yellen? What exactly will he do to the Dodd-Frank Act? Answers have been elusive.

“It’s really tough to tell with Trump,” said Justin Schardin, a financial policy expert at the Bipartisan Policy Center. “There’s no indication that financial regulation is a high-profile issue for him.”

Trump said in August he’d issue a temporary moratorium on new regulations. (Would such a move halt rules on bank capital that haven’t taken effect?) He’s said he’ll repeal Dodd-Frank. (Does he plan to swap it for new regulations to keep banks from sliding into the Wild West?) He’s also said he’ll bring back the Glass-Steagall Act’s wall between commercial and investment banking. (Isn’t that a new regulation?)

Wall-Street has spent billions of dollars complying with Dodd-Frank, and it has transformed how banks do business. The biggest lenders are intimately familiar with most of its terrain, having battled over virtually every inch of the law during the last six years. What does it mean when Trump says he wants to dump it? The industry has no idea, but getting rid of the legislation could be a pain. While Democrats debated Wall Street policy during their primaries, the topic wasn’t a central feature of the Republican contest.

Not knowing costs money. Bank business models may need to be revamped if big changes are made, and whenever a dramatic revamp is brewing, the firms spend a lot on legal advice and lobbying.

When Trump has talked about Wall Street and the hedge fund industry, he’s bashed them, which has gone over well with his supporters. He ran an ad in his campaign’s final days, for instance, that featured Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein as a representative of the corporations that Trump says have pocketed the wealth that American workers have lost. And he’s accused hedge fund managers of “getting away with murder” on paying taxes.

Yet, he tapped hedge fund managers and financiers as advisers, including making Steven Mnuchin, a former Goldman Sachs executive who founded hedge fund Dune Capital Management, his finance chairman. His economic advisory council includes John Paulson, a billionaire hedge fund manager, and Stephen Feinberg, CEO of private-equity firm Cerberus Capital Management.

GREGG NEWTON/AFP/Getty Images

“We’ll be putting a monster in the White House”

In broad terms, the financial sector has historically counted on Republicans to give its policy goals a friendly ear. But the financial crisis made that bond much more tenuous. Hearings on Capitol Hill these days, such as those focusing on Wells Fargo & Co.’s bogus account scandal, are as likely to feature GOP criticism of banks as attacks from Elizabeth Warren.

Still, Trump is a businessman. He seems to distrust regulation, and bankers likewise feel the government has gone too far in the wake of the crisis. The industry can probably count on Trump to appoint less-aggressive leaders to agencies like the Securities and Exchange Commission.

But an even greater uncertainty will be whether the government outsider will sign off on legislation pushed by Republican lawmakers. A single party hasn’t controlled both Congress and the White House since the first two years of Barack Obama’s presidency. That’s the period that led to the passage of both Dodd-Frank and Obamacare. With Republicans retaining control of Congress, Trump has the pieces in place for a real legislative push.

Will he use legislation introduced earlier this year by House Financial Services Chairman Jeb Hensarling as a template? Hensarling, a Texas Republican, wants to tear up core sections of Dodd-Frank, including the Volcker Rule ban on certain bank investments and government powers to take apart failing financial firms.

Will Trump similarly allow the possible future Senate Banking chairman, Mike Crapo, to get his way? Lobbyists and Capitol Hill staff expect Crapo to overhaul the status of mortgage-finance giants Fannie Mae and Freddie Mac and make revisions to Dodd-Frank, including narrowing the list of banks subject to its toughest rules.

One of the financial initiatives Trump has called for — reinstating the Glass-Steagall separation between bank lending and securities underwriting — would need congressional backing. But Wall Street has been befuddled by Trump’s bashing of rules, while pushing for a regulation that would completely change the banking industry. And bringing back Glass-Steagall hasn’t traditionally been a policy Republicans support.

“It’s time for a 21st Century Glass-Steagall,” Trump says on his website. That phrase, a “21st Century Glass-Steagall Act,” also happens to be the actual title of the bill pushed by one of his chief antagonists: Warren, a Democratic senator from Massachusetts.

Though she might favor a new Glass-Steagall, Warren’s prized Consumer Financial Protection Bureau could be on very shaky ground. Created by Dodd-Frank, the CFPB has toughened oversight of mortgage lending and credit cards. It was among agencies that fined Wells Fargo $185 million for opening up scores of accounts without customers’ approval.

“I would look at the CFPB as an area of focus,” said Isaac Boltansky, an analyst at Compass Point Research & Trading LLC in Washington. Trump would have the power to fire Director Richard Cordray on his first day in office, Boltansky said.

“No one is prepared for a Trump presidency,” said Tony Fratto, a former assistant Treasury secretary in President George W. Bush’s administration who now works for banking clients as a partner at Hamilton Place Strategies. More pointedly, he added that Trump’s presidency will bring so many problems that a question like “Who is named SEC chair?” doesn’t matter as much.

]]>Wall_StreetBloomberg NewsGREGG NEWTON/AFP/Getty ImagesFinancials lift S&P/TSX and Wall Street, miners chip in too in Toronto but oil stocks weighhttp://business.financialpost.com/investing/market-moves/financials-lift-sptsx-and-wall-street-miners-chip-in-in-toronto-but-oil-stocks-weigh/wcm/490c3577-a16c-48ec-b89e-54f3abd9e8d8
Mon, 29 Aug 2016 16:04:23 +0000https://financialpostcom.wordpress.com?p=690047&preview_id=690047]]>Financial stocks were the major drivers of markets in Toronto and Wall Street pushing the S&P/TSX Composite and the major U.S. indices up.

In Toronto, the TSX made slight gains in morning trading on Monday, with rises for banks and miners offsetting energy shares’ declines as the price of oil pulled back.

At 10:30 a.m. EDT, the Toronto Stock Exchange’s S&P/TSX composite index was up 24.26 points, or 0.17 per cent, at 14,664.14 while Wall Street rose on Monday morning, helped by financial stocks that gained a day after Federal Reserve Chair Janet Yellen said the case for an interest rate hike had strengthened.

Yellen, addressing a gathering of global central bankers on Friday, said the central bank was close to meeting its goals of maximum employment and stable prices, while describing consumer spending as “solid.”

Yellen gave little indication of when the Fed would move but Vice Chairman Stanley Fischer suggested that a move as soon as next month could be possible.

Financial stocks, which stand to gain the most in a higher interest rate environment, rose as traders raised bets on a hike in the coming months.

The S&P 500 financial index rose 0.6 per cent, with Wells Fargo and JPMorgan rising about 0.8 per cent. The index was trading at its highest level since Dec. 30, shortly after the Fed raised rates for the first time in nearly a decade.

On the S&P/TSX, six of the index’s 10 main groups were higher, with advancers and decliners almost equally split overall.

The most influential movers on the index included Toronto-Dominion Bank, which rose 0.6 per cent to $57.64, and Royal Bank of Canada, up 0.4 per cent at $81.87.

The heavyweight financial sector, which was up 0.3 per cent overall, had produced a string of encouraging bank earnings reports last week, including from TD, Canadian Imperial Bank of Commerce and Bank of Montreal.

But lower oil prices on the resource heavy TSX pushed down the energy group 0.3 per cent, Crude prices were weighed down Monnday by higher output from Middle Eastern producers and a stronger U.S. dollar, in which the commodity is priced. The dollar index rose 0.25 per cent, trading at more than a two-week high, while oil prices slipped more than 1 per cent.

U.S. crude prices were down 1.8 per cent at US$46.77 a barrel, while Brent lost 1.6 per cent to US$49.12.

TSX-listed Suncor Energy lost 0.6 per cent to $36.27. Pipeline companies lost ground, with Enbridge Inc down 1.1 per cent at $51.38 and Pembina Pipeline Corp off 0.9 per cent at $39.31.

Bloomberg

The materials group, which includes precious and base metal miners and fertilizer companies, gained 0.7 per cent.

Ivanhoe Mines Ltd. jumped 13 per cent to $1.89 after it said it planned to hire an investment bank to review expressions of interest the company and its projects have received in recent months.

Major gold miners also pushed the sector higher even as prices of the metal slid to a nearly five-week low after comments from top Federal Reserve officials fueled speculation that U.S. interest rates would rise sooner rather than later.

Gold futures fell 0.2 per cent to US$1,319 an ounce, and copper prices lost 0.2 per cent to US$4,615.15 a tonne.

At 9:39 a.m. EDT, the Dow Jones Industrial Average was up 74.82 points, or 0.41 per cent, at 18,470.22.

The Nasdaq Composite was up 11.51 points, or 0.22 per cent, at 5,230.42.

Microsoft rose 0.8 per cent and gave the biggest boost to the S&P 500 and the Nasdaq after UBS raised its price target.

Mylan shares rose 1 per cent after the drugmaker announced a generic version of its allergy treatment EpiPen.

Herbalife rose 4 per cent after Carl Icahn bought 2.3 million shares in the nutritional supplements maker after denying reports of attempts to sell his stake.
Advancing issues outnumbered decliners on the NYSE by 1,763 to 859. On the Nasdaq, 1,327 issues rose and 903 fell.

Thomson Reuters

]]>canbanksReutersBloombergTaming Wall Street: Amid populist backlash against capitalism, the business of finance is losing its mojohttp://business.financialpost.com/investing/taming-wall-street-amid-populist-backlash-against-capitalism-the-business-of-finance-is-losing-its-mojo/wcm/57f4871d-90c0-4bb9-922b-b180e662ebdd
Mon, 25 Jul 2016 17:44:17 +0000https://financialpostcom.wordpress.com?p=681364&preview_id=681364]]>Chris Hentemann has two pieces of art on the walls of his corner office in midtown Manhattan. One is an oversize photograph of the cockpit of his twin-engine Beechcraft Baron. The other is an Andy Warhol print of Muhammad Ali with his fists cocked.

For Hentemann, a rail-thin money manager who has spent 25 years in finance, the two pictures capture the duality of Wall Street. It’s an industry where you need to manage risk with precision and discipline, but it’s also one driven by audacity, ego and the killer instinct. Or at least it used to be.

In an era defined by a populist backlash against rapacious capitalism, the business of finance has lost its mojo. An industry that used to celebrate the invisible hand of the free market, that once showered shareholders and employees with unprecedented wealth, has been chastened by US$284 billion in fines over the past eight years.

While Wall Street has long prided itself as a hotbed of innovation, today it’s ensnared in a web of rules to prevent bankers from once again threatening the global economy. Profitability and compensation are falling as forces unleashed by the 2008 financial crisis take their toll.

“The more the regulators push, the more they’re turning banks into financial utilities,” says Hentemann, 48, a former head of structured finance at Bank of America Corp. who now runs a US$1.5 billion credit-focused hedge fund called 400 Capital Management. “But after what happened in the crash, can you blame them?”

The crackdown didn’t seem to matter to supporters of Democratic presidential candidate Bernie Sanders, who called for the breakup of too-big-to-fail institutions. Now the Republican Party platform and the final draft of the one approved by Democrats call for reinstatement of the Glass-Steagall Act of 1933, which separated commercial and investment banking.

If enacted, the measure could break up JPMorgan Chase & Co., Bank of America and Citigroup Inc. The 17 million Britons who voted last month to quit the European Union didn’t care that their nation’s financial-services industry, which accounts for eight per cent of the economy, might have to move some operations overseas.

That’s sobering news for a business that dared to hope the post-crisis reckoning was drawing to an end. For eight years, the men and women who work in finance have been playing defense. More than half a million jobs have vanished from the world’s biggest banks since 2008, data compiled by Bloomberg show. Top- tier hedge funds and money-management firms are dropping fees and cutting employees to stay competitive.

With new capital requirements and tougher stress tests looming, bank chieftains probably will be squeezing even more expenses from their organizations for years to come. This year, revenue at investment banks in the U.S. and Europe will shrink by one-fifth compared with 2010, to US$212 billion, according to Boston Consulting Group. Finance pros are confronting a reality they once deemed unthinkable — the rollicking game they played for so long has been tamed.

“It’s a once-in-a-lifetime shift. The architecture in banking is evolving from conglomerates into smaller, nimbler, specialized providers”

As government watchdogs tighten their grip, a sputtering global economy and a horde of fintech startups assailing the castle walls are forcing changes few foresaw in the wake of the crash. Influential bankers such as JPMorgan Chief Executive Officer Jamie Dimon and Banco Santander SA Chairman Ana Botin are investing millions of dollars in ventures to defend their turf from interlopers and win over millennials who live their lives on smartphones. Even the 322-year-old Bank of England is making a move: In June, Governor Mark Carney announced the launch of a fintech accelerator.

“It’s a once-in-a-lifetime shift,” says Vikram Pandit, who, as CEO of Citigroup from 2007 to 2012, led the definitive global financial supermarket. “The architecture in banking is evolving from conglomerates into smaller, nimbler, specialized providers. This isn’t just technological, it’s a shift in business models.”

For all the efforts to rein in the financial industry since 2008, it does have a record of shaking off disasters, from the U.S. savings and loan crisis of the 1980s to the dotcom bust of 2001. Scandals have engulfed the biggest investment banks in recent years, from subprime mortgages to the rigging of the foreign-exchange market to helping wealthy clients sidestep taxes. But Wall Street almost always finds a way to adapt to new rules, bewitch investors with new products and bolster its bottom line.

Andrew Burton/Getty Images

“This is a sector that has periods of calm, but we shouldn’t assume that surges of recklessness and outright fraud have been wiped away,” says Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, a panel appointed by Congress in 2009. “There is always a clear and present danger of that type of behavior returning.”

This clampdown doesn’t look like it will end anytime soon. Instead, the industry is changing at a structural level. Not a month passes without a bank or broker-dealer announcing another business shutdown or market retreat. Credit Suisse Group AG and Deutsche Bank AG recently hit the reset button on top-to-bottom reorganizations, and Barclays Plc announced in March that it was withdrawing from an entire continent, Africa, after 91 years. Even Goldman Sachs Group Inc., which has watched its shares drop 23 per cent in the past 12 months, has been humbled. In April, it started offering consumers online savings accounts. The price of admission: US$1.

Brexit compounds the pressure on financial firms by casting London’s future as an international financial capital into doubt. Even as British banks weigh plans to offshore operations such as clearing to Continental Europe, investors have found another reason to bail from their stocks. Barclays and Royal Bank of Scotland Group Plc have each lost about a fifth of their value since June 23. The vote prompted the government to push back by two years the sale of its 72 per cent stake in RBS, which was nationalized in 2008 to save it from insolvency. Likewise, British taxpayers will have to wait on the sale of their nine per cent stake in Lloyds Banking Group Plc.

No precinct in the industry is being whipsawed more than fixed income. While stock trading went electronic long ago and now moves at light speed, the US$8.4 trillion U.S. corporate bond market is relatively unchanged since Michael Lewis played Liar’s Poker with his pals at Salomon Brothers in the 1980s. The corporate debt game is still dominated by big broker-dealers, and 80 percent of trades are still executed by phone, according to Greenwich Associates.

But the one-two punch of regulation and technology is softening up this bastion of 20th century finance. The 2010 Dodd-Frank Act in the U.S. and new global capital requirements have forced banks to cease borrowing at 30 to 50 times their capital to make proprietary bets in the markets and juice bonuses. The Federal Reserve and its counterparts in Europe stress test lenders every year.

Meeting the capital requirements has made it less profitable for banks to play their time-honored role as middlemen in fixed income. Last year, companies issued US$1.5 trillion in debt, double what they sold in 2008. Yet primary dealers have decreased inventories of bonds to help buyers and sellers trade, according to the Federal Reserve Bank of New York.

One out of three bond traders have been fired in the past five years. This harsh reality is turning an eat-what-you-kill culture that prized risk-taking into one that’s guarded and paranoid

As a result, there’s less action on trading floors. Profit from dealing fixed income, currencies and commodities, or FICC in industry parlance, has dropped 56 per cent globally since 2012, to US$26 billion, according to Boston Consulting Group. One out of three bond traders have been fired in the past five years, says research firm Coalition Development. This harsh reality is turning an eat-what-you-kill culture that prized risk-taking into one that’s guarded and paranoid.

“Today it’s play it safe, play it conservatively, don’t rock the boat,” says Heather Hammond, co-head of the global banking and markets practice at executive search firm Russell Reynolds Associates.

Even as traders see their friends fired, banks are bringing in battalions of compliance lawyers, accountants and even spies from the CIA and British intelligence to watchdog them. Like something out of “The Matrix,” new reg-tech startups are releasing algorithms into the datastream of banks to hunt for behavorial patterns that anticipate rogue trades before they happen.

While star performers still pull down high-seven-figure or eight-figure pay packages, quiet trading desks mean smaller rewards for the rank and file. The average compensation for senior equity and fixed-income traders has fallen by more than half since 2007, according to Options Group, a New York executive search firm specializing in the financial industry.

“The days when you could get a 30 per cent to 50 per cent jump in salary guaranteed for two years and a 20 per cent to 100 per cent signing bonus are gone,” says Options Group CEO Mike Karp. “And they are never coming back.”

The pain for some has created opportunities for others. The bond market’s next chapter is taking shape in a 106-year-old brick building in lower Manhattan that used to store fountain pens. These days it houses startups. Amar Kuchinad, founder and CEO of one of them, Electronifie Inc., is building a digital trading platform for corporate debt.

Sitting in a conference room in the firm’s loft-style office, complete with Ping-Pong table, Kuchinad describes how he became intrigued by the changes wrought by Dodd-Frank and the Basel Committee on Banking Supervision. So he quit his job as a managing director in Goldman Sachs’s credit-trading unit in 2011 and joined the Securities and Exchange Commission as a senior policy adviser. Suddenly, he found himself on the other side of the table from his former industry as it dealt with new capital ratios.

He drew another conclusion: The time had come to provide a digital alternative that could match buyers and sellers without the need for dealers. In 2013, he formed Electronifie, and since then it has executed about US$2 billion of transactions with a network of more than 450 traders. It’s not alone. Dozens of platforms, including industry leader MarketAxess Inc. and one owned by Bloomberg LP, the parent of Bloomberg News, are making inroads with the model.

“That means a lot more of this business is going to be data-driven instead of relationship-driven,” says Kuchinad, 42.

Investors, too, are seeing their models shaken by the stark realities of a post-crash world. Pension plans and the super- rich plowed cash into hedge funds, whose combination of mystique and exclusivity promised market-beating performance. As assets in these vehicles almost doubled to US$2.7 trillion from 2008 to 2015, they’ve delivered anything but. The S&P 500 Index returned 80 per cent including reinvested dividends in the five years through July 20 compared with a decline of 1.3 per cent for the HFRX Global Hedge Fund Index.

Adding insult to injury, investors typically pay hedge funds a 2 percent management fee and 20 per cent of their profits. You can buy shares in an S&P 500 ETF for 0.09 percent. More than 970 hedge funds closed last year, the most since 2009, according to Chicago-based Hedge Fund Research. In May, Tudor Investment Corp., the US$11.6 billion hedge fund run by Paul Tudor Jones, reduced its fees. Mutual funds are getting hit, too. On June 16, Grantham Mayo Van Otterloo & Co., the New York firm founded by Jeremy Grantham, cut 10 percent of its 650-person staff following a 20 percent drop in assets.

It’s no wonder the best and brightest are casting their eye on careers in Silicon Valley instead of Wall Street. At New York University’s Stern School of Business, students are seeking out courses that blend finance, technology and entrepreneurship.

“They want data analytics first and foremost, and they’re much less interested in the pricing of derivatives,” says David Yermack, chairman of the school’s finance department. “Corporate finance as we have taught it is less and less relevant. In a way, we’re at the same risk of disruption as the banks.”

Some industry stalwarts see little choice but to disrupt themselves. For 30 years, the brokers at Icap Plc have traded swaps, U.S. government bonds and other securities for dealers worldwide. On a June afternoon, you can see a vestige of their operation at Icap’s base near London’s Liverpool Street Station. A trader on the interest rates swaps desk jumps up and hollers a bid as he slaps a phone receiver into his palm. Others shout counteroffers, while a pair of apprentices with Sharpies jot numbers on a tote board.

Zoom out, though, and you’ll see some of the surrounding desks are unoccupied. This can’t be chalked up just to electronification. With capital ratios spurring costs on risk- weighted assets and low interest rates squeezing gains, volume has slid along with the unit’s profit margins. In the fiscal year ended in March, voice-broking accounted for only one-fifth of Icap’s trading operating profit, and in November CEO Michael Spencer made a deal to sell the division to Tullet Prebon Plc for 1.1 billion pounds (US$1.4 billion).

Emile Wamsteker/ Bloomberg News

Now the interdealer broker is transforming itself from a noisy bazaar into a fintech firm organized largely around its post-trade risk and information business. Later this year, the unit will roll out an offering designed to help banks save money by replacing the outdated systems used to reconcile and validate trading positions with one simple platform.

“Banks are so stressed now,” says Jenny Knott, CEO of post- trade risk at Icap. “Surviving with the current margins isn’t going to be achievable, and regulation is still coming. These guys have to take out costs over the next years. They have to turn stuff off as quickly as possible.”

For all the tumult, some senior bankers are confident their industry will eventually emerge stronger and leaner.

“Imagine what happens when the foot comes off the brake and clients start trading more actively and interest rates start rising,” says Chris Purves, the London-based global co-head of fixed-income rates and credit trading at UBS Group AG, which has scaled back fixed income to concentrate on wealth management. “You’re going to have these battle-hardened, tremendously efficient operations that can scale quickly.”

It’s an optimistic thought. But the big question for the rest of society is whether the financial-services industry will indelibly change its ways. Throughout its history, Wall Street has profited from complexity. During the housing boom in the 2000s, it wrapped relatively simple instruments like mortgages in complicated schemes ostensibly designed to neutralize risk. Economies in Europe and the U.S. continue to endure the reverberations of that frenzy of CDOs and CMOs and CDSs and CDOs squared.

“Imagine what happens when the foot comes off the brake and clients start trading more actively and interest rates start rising”

Lawmakers on both sides of the Atlantic are betting that by forcing banks to shun leverage and take on more capital they can break the industry’s dangerous habits, once and for all. There’s a lot riding on the fulfillment of those goals. In the U.S., anger over bank bailouts fueled populist movements ranging from Occupy Wall Street and the Tea Party to the campaigns of Bernie Sanders and Donald Trump. In Europe, the events of 2008 exposed the fiscal weaknesses of the 28-nation EU and ushered in a period of austerity and popular revolt that appears to be intensifying.

Even with all the changes, four of the six biggest banks in the U.S. are larger than they were in 2008. In Britain, the assets of the top four banks are more than twice the size of the nation’s economy.

“The industry is less complex than it was, it does have less leverage, and it is tamer,” says Sallie Krawcheck, president of Bank of America’s global wealth-management division from 2009 to 2011 and now head of Ellevest, a digital-investment platform for women. “But is that enough? If a similar crisis were to happen again, would any of these institutions remain standing? I would guess the answer is no.”

]]>Rally At Wall Street Protests Financial BailoutBloomberg NewsJacob Kepler/BloombergAndrew Burton/Getty Images John Moore/Getty ImagesEmile Wamsteker/ Bloomberg NewsA look at the adviser-corporation-client relationship: Just advice and no guaranteeshttp://business.financialpost.com/investing/investing-pro/a-look-at-the-adviser-corporation-client-relationship-just-advice-and-no-guarantees/wcm/2fc47e67-36b4-431a-a050-fd05cbe26316
http://business.financialpost.com/investing/investing-pro/a-look-at-the-adviser-corporation-client-relationship-just-advice-and-no-guarantees/wcm/2fc47e67-36b4-431a-a050-fd05cbe26316#respondFri, 15 Jul 2016 21:57:59 +0000http://business.financialpost.com/?p=679172]]>It’s a question that comes to mind from time to time when a big corporate takeover fails to work out as planned: What about all that high-priced financial advice the firm was paying for? How could they all get it so wrong? And more to the point, why don’t companies do anything about it?

The answer is succinct: Accountability but not liability.

That’s the phrase used by one of the country’s prominent mergers and acquisitions lawyers, to describe the relationship between a financial adviser and a corporation receiving that advice.

“It’s their opinion. And their opinion is always at a certain date, and based on certain industry-standard metrics,” said the lawyer, noting that the metrics include discounted cash flow analysis and a comparison of multiples from previous transactions.

“But the outputs are only as good as the inputs,” noted the lawyer. And those inputs often come from management where the adviser relies on the information provided and uses professional judgment to reach a conclusion on the transaction’s fairness.

Another M&A lawyer noted that the buyer is meant to be the industry expert, not the adviser whose role is to provide high level financial advice. “They don’t go into realistic synergies, they can’t find out, for example, the quality of the target’s inventory control systems. They are getting paid the big fee, [but] it doesn’t meant that they are doing lots of work,” he said, noting that if a transaction doesn’t pan out as expected, the advisers can suffer reputational damage. “If people perceive the value of their work to be shoddy, then they won’t get hired.”

So what about adviser negligence, an area that seems to have potential for an action by the corporation against the adviser?

“If you have true conflicts of interest or egregious errors, then it’s fair game to have liability,” for the opinion, added a M&A lawyer. “The standard for negligence is very high and in Canada there have been very few, if any, examples of a company suing.”

In the U.S. there are more examples, though the prominent cases are those brought by shareholders against an adviser. And those cases typically involve an undisclosed conflict of interest by the adviser.

And because the adviser’s view is time dated, the opinion doesn’t look forward. In other words the opinion can’t determine whether the buyer is making a good investment.

And there’s reason to be skeptical: a 2011 report titled, The Big Idea: The New M&A Playbook, and published in the Harvard Business Review noted that despite the trillions of dollars spent annually on acquisitions “study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. As to why this occurs the study notes “companies too often pay the wrong price and integrate the acquisition in the wrong way.”

And because it’s a point in time, the opinion from the adviser doesn’t consider the possibility of, for example, an economic downturn, of a commodity cycle crash, or a new technology.

If it did then there’s a fair chance that Barrick Gold, would not have agreed to outlay more than $7 billion to buy copper producer Equinox Minerals in 2011; and that Kinross Gold would have spent $7.1 billion to acquire the balance of Red Back Mining in 2010. Both deals resulted in large writedowns. “The opinion from the adviser is not a guarantee,” noted one lawyer.

Let’s give the final word to legendary investor Warren Buffett. At this year’s Berkshire Hathaway annual meeting in reference to investment consultants he was quoted saying this: “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities. There are a few people out there that are going to have an outstanding investment record.”

]]>http://business.financialpost.com/investing/investing-pro/a-look-at-the-adviser-corporation-client-relationship-just-advice-and-no-guarantees/wcm/2fc47e67-36b4-431a-a050-fd05cbe26316/feed0buffettbcritchleyIn the secretive world of hedge fund managers, the top five made more than $1 billion each last yearhttp://business.financialpost.com/news/fp-street/the-top-five-hedge-fund-managers-made-more-than-1-billion-each-last-year/wcm/5735b763-95bf-4f59-9f16-ab99de7dc016
Wed, 11 May 2016 19:22:02 +0000https://financialpostcom.wordpress.com?p=658802&preview_id=658802]]>NEW YORK — Wall Street’s elite club of hedge fund managers got a bit richer last year, according to an annual ranking published this week. The top two hedge fund managers made US$1.7 billion each in 2015, and the top 25 averaged 10 per cent more than last year.

The rankings, issued by Institutional Investor’s Alpha magazine, offer a rare peek inside the world of hedge fund managers, who can make massive bets on stocks or bonds and walk away with billions in profits. The top five hedge fund managers made more than US$1 billion each last year. The top 25 hedge fund managers made a combined US$12.94 billion, according to Institutional Investor’s Alpha magazine. Among the top 25 hedge fund managers, the average pay was US$517.6 million. Only one woman ranked among the 50 highest-paid executives.

That puts the leaders of the hedge fund industry, a secretive and lightly regulated group, well ahead of banking executives, who have been put under greater scrutiny since the 2008 financial crisis. Jamie Dimon, chief executive of the largest bank in the country, JPMorgan Chase, made a relatively measly US$25 million last year by comparison. Another frequent target of Wall Street critics, Lloyd Blankfein, the chief executive of Goldman Sachs, made US$23 million in 2015.

Meanwhile, the hedge fund industry has doubled in size over the past decade, and executives are bringing in high pay despite weathering a tough year in the financial markets. Dan Loeb, the head of Third Point, a large and well-known hedge fund, said in a letter to investors last month that the industry is in the “first innings of a washout.” Five hedge fund managers made enough to rank among the industry’s highest paid despite losing money in at least one of their funds in 2015, according to Institutional Investor.

The industry is a frequent target of critics who say the world’s wealthiest financiers are benefiting from a broken U.S. tax code. Hedge fund managers’ profits are treated as long-term capital gains, which means they’re taxed at no more than 15 per cent. Critics say those earnings should be taxed as ordinary income, or as much as 39.6 per cent. Even Republican presidential candidate Donald Trump has called for an end to the discrepancy, saying “hedge fund guys are getting away with murder.”

“There’s absolutely no justification for promoting this activity through reduced tax rates,” said Bart Naylor, a financial policy advocate for Public Citizen.

Just last month, U.S. regulators proposed new rules to overhaul how Wall Street executives are paid, addressing years of complaints that excessive bonuses helped lead to the 2008 financial crisis. But hedge funds, which have grown into a nearly US$3 trillion industry, are not expected to be significantly affected by the rules, industry experts have said.

The only woman on Alpha’s list, Leda Braga, founded Systematica Investments in January 2015 and made US$60 million last year. Braga ranked 44th among the top 50 hedge fund managers listed in the ranking.

This is Braga’s first time among the highest-paid people in the industry, but she has long been considered the most powerful female hedge fund manager in the world and is known as the “queen of quants” in some circles.

Jason Alden/Bloomberg; Chip Somodevilla/Getty Images

Leading the list was Kenneth Griffin of Citadel, one of the world’s largest asset managers, which on some days is involved with 10 per cent of the stocks trading hands; and James Simons, a former Cold War code breaker, of Renaissance Technologies. Both made US$1.7 billion each in 2015.

Griffin has also been a major contributor to Republican campaigns, including to a political action committee backing then-presidential candidate Sen. Marco Rubio. Simons has given to Democratic campaigns in the past.

“No one questions the guy who signs a $175 million baseball contract or a movie star who earns $40 million, $50 million for a movie,” said Mike Karp, chief executive of Options Group, a recruiting firm for the financial-services industry. “These hedge fund managers possess unique levels of business and market acumen — they are the top athletes in the business.”

]]>hedge-fund-billionairesnpwapoJason Alden/Bloomberg; Chip Somodevilla/Getty ImagesCredit Suisse: These are the sectors investors love and hate right nowhttp://business.financialpost.com/investing/market-moves/credit-suisse-these-are-the-sectors-investors-love-and-hate-right-now/wcm/7c247152-0876-4f59-bc9c-074c272e6d1e
Wed, 11 May 2016 16:04:45 +0000https://financialpostcom.wordpress.com?p=658669&preview_id=658669]]>At times like these, where the overall market is flat and Wall Street in general doesn’t expect the S&P 500 to move much higher through the end of the year, there’s interest in figuring out what stocks and sectors will outperform. The team at Credit Suisse, led by chief U.S. equity strategist Lori Calvasina, looked at which sectors have the most bullish and bearish consensus views from hedge funds, mutual funds, and sell-side analysts. It does this on a quarterly basis, and here are some of the takeaways from the current positioning vs. the historical norms.

Here’s a look at the crowded trades where all three camps are in agreement:

Underweight small cap retailers

Underweight small cap household and personal products

Underweight large cap materials

Overweight large cap banks

Overweight small cap semiconductor companies and semi equipment

Overweight small cap software and services

Figuring out the bullish or bearish stances varied by investor group. For hedge funds, Credit Suisse looked at net exposure to indexes like the Russell 1000 and Russell 2000 as well as ETFs. Compiling the mutual fund data required looking at the overweights relative to that fund’s benchmark. Lastly, sell side data was determined by the net buy ratings.

However, don’t start buying those large overweights such as the banking sector just yet. The team said that this heavy consensus sentiment has them a bit concerned. “Extreme, potentially peaking bullishness across the board,” they wrote on the large cap banks. Same thing goes for the small cap semis and semi equipment where they say, “Extreme bullishness in all camps, likely peak among HF’s ⅛hedge funds⅜.”

To be the contrarian, look at a potential bottom in small cap retail where they say the positioning “supports our mid-April upgrade to market weight, but there may still be some risk of unwinding in large caps.”

]]>NYSE_STOCKS.1Bloomberg NewsSohn Investment Conference long on short ideashttp://business.financialpost.com/investing/sohn-long-on-short-ideas-as-druckenmiller-sees-spent-bull-market/wcm/c2d1c0bb-ef42-439a-84c2-2709dcddec78
http://business.financialpost.com/investing/sohn-long-on-short-ideas-as-druckenmiller-sees-spent-bull-market/wcm/c2d1c0bb-ef42-439a-84c2-2709dcddec78#respondThu, 05 May 2016 18:34:58 +0000https://financialpostcom.wordpress.com?p=656995&preview_id=656995]]>As hedge fund managers including David Einhorn and Jim Chanos touted their trade ideas at one of the industry’s marquee events, the overriding message was clear: Go short.

Billionaire Stan Druckenmiller said the bull market in stocks is wearing itself out. Other speakers at the Sohn Investment Conference in New York on Wednesday recommended betting against targets ranging from machine maker Caterpillar Inc. to MTN Group Ltd., Africa’s largest wireless operator.

Druckenmiller, who has one of the best long-term track records in money management, said that while he’s been critical of Federal Reserve stimulus policy for the last three years, he had expected it would lead to higher asset prices.

“I now feel the weight of the evidence has shifted the other way,” Druckenmiller said. “Higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.”

Druckenmiller, a former chief strategist for George Soros, said gold is his largest currency allocation as central bankers experiment with the “absurd notion of negative interest rates.”

Einhorn, who runs US$9 billion Greenlight Capital, said shares of Caterpillar are set to topple along with the prices of natural resources like coal and iron ore, and its revenue from construction won’t save it. Einhorn said the Peoria, Illinois- based company’s earnings will fall to US$2 per share, a little more than half what Wall Street analysts predict.

“The market thinks Cat’s business is at the bottom and poised for recovery, so the shares trade at a fancy multiple of perceived trough earnings,” Einhorn said. “But is it really at or near trough?”

Chanos, famed for predicting the 2001 collapse of Enron Corp., recommended shorting Johannesburg-based MTN Group as demand for services in its largest markets is being hurt by falling commodity prices.

The company gets more than 60 per cent of its sales from Nigeria and South Africa, where declining oil and metals prices have slowed economic growth, said Chanos, who runs Kynikos Associates. Subscriber numbers have fallen in both countries, exacerbated by outages ordered by the government in Nigeria, its No. 1 market, he added.

“Nigeria is a borderline failed state in our view,” Chanos said. Profits to MTN shareholders could be “eviscerated” by about 50 percent, he said.

PointState’s Zach Schreiber, an alumnus of Druckenmiller’s former hedge fund, said he’s pessimistic on oil in the longer term and betting against the Saudi riyal.

Saudi Arabia is economically unsustainable at current oil prices and is likely to be “structurally insolvent” in two to three years, according to Schreiber, who made a US$1 billion profit shorting oil in 2014.

Carson Block of Muddy Waters Capital recommended shorting Bank of the Ozarks Inc., saying its earnings growth is unsustainable and its balance sheet may come under pressure.

]]>http://business.financialpost.com/investing/sohn-long-on-short-ideas-as-druckenmiller-sees-spent-bull-market/wcm/c2d1c0bb-ef42-439a-84c2-2709dcddec78/feed0SOHN_CONFERENCEBloomberg NewsThe one per cent of the one per cent: An inside look at Citi’s secret client listhttp://business.financialpost.com/investing/global-investor/the-one-per-cent-of-the-one-per-cent-an-inside-look-at-citis-secret-client-list/wcm/97917efb-e685-42cd-96ca-c08e73e8df76
Mon, 28 Mar 2016 21:12:29 +0000https://financialpostcom.wordpress.com?p=644736&preview_id=644736]]>There’s a secret list that Citigroup Inc. keeps on its equity-research desk at its swank new campus in Tribeca.

And if you’re not on it — well, you might as well be nobody.

At the top is a handful of hedge-fund giants, the “Focus Five,” that bring in big money for Citigroup: Millennium, Citadel, Surveyor Capital, Point72 and Carlson Capital, according to a person with direct knowledge of the list. It represents a growing trend on Wall Street where the most-lucrative clients get the best service: the top trade ideas, hours-long calls with analysts, intimate soirees with executives, bespoke trading models, on and on.

Across the global financial industry, a new class system is emerging. Banks are jettisoning the we-do-everything model to cater to prized clients that generate the most revenue while turning others away. At Citigroup, Morgan Stanley, HSBC Holdings Plc and more, entire businesses are being focused on the wealth and influence of a new financial elite — what amounts to the one per cent of the one per cent.

And with the rise of this 0.01 per cent, one thing is clear: Even on Wall Street, the divide between the privileged few and everyone else is growing — and fast.

‘Rude awakening’

“It’s a rude awakening when you find out that research isn’t readily available” from Wall Street banks, said Jeff Sica, who oversees about US$1.5 billion as the president of Circle Squared Alternative Investments in Morristown, N.J.

[np_storybar title=”Who are the Focus Five?” link=””]
‘Focus Five’ firms at Citigroup. Holdings of U.S. stocks:

Scott Helfman, a Citigroup spokesman, said the bank doesn’t comment on its relationships with clients, while Morgan Stanley’s Tom Walton declined to comment. HSBC said in a statement that it’s “reducing the number of dormant and low-revenue clients” to help the firm build a more sustainable business.

Whether it’s in equities or fixed-income, the shift in priorities is undeniable.

Morgan Stanley now ranks its most-profitable European fixed-income customers in three groups — “supercore,” “core” and “base,” said people familiar with the matter, who asked not to be identified because they aren’t authorized to speak publicly. Everyone else — about 2,000 firms in total — has limits on their access to the company’s management, sales and research departments.

Client cull

At HSBC, about half of its 3,000 financial institution customers across the currency, debt, equity and trade finance businesses have been cut in the past 18 months, a person with knowledge of the matter said. Europe’s largest lender also created a group of less than 200 institutional and other financial clients that are its highest priority.

Even smaller banks have come up with their own client lists targeting a select number of investment firms, with Stifel Financial Corp. dubbing a roster of 21 top-tier targets as its “Blackjack” list. Chief executive officer Ronald Kruszewski, whose firm bills itself as the biggest provider of equity research in the U.S., said in an interview that his equity sales unit had compiled such a list about three years ago, but that it’s currently not in use.

I would be surprised at any firm that is trying to sell a product that didn’t have a list

“I would be surprised at any firm that is trying to sell a product that didn’t have a list,” Kruszewski said.

In some ways, the banks have little choice.

In the post-crisis world of stricter regulations and rock-bottom interest rates, banks are struggling to boost profitability. Income that commercial banks get from making loans has slumped, while new rules have made it much harder to earn easy money from trading bonds, currencies and commodities — long the biggest source of industry profits — by curbing the firms’ risk-taking and forcing them to hold more capital.

Little choice

At the biggest investment banks, revenue from fixed-income sales and trading fell to US$61.8 billion last year, the fifth decline in six years, according to Bloomberg Intelligence. While Wall Street ultimately eked out a record year of earnings by slashing jobs and cutting costs, most firms failed to generate a return on equity of at least 10 per cent — a key measure of profitability.

Simon Dawson/Bloomberg

Things haven’t been much better in 2016. In the past month, both Citigroup and JPMorgan Chase & Co. warned total first-quarter trading revenue will drop. Credit Suisse Group AG CEO Tidjane Thiam said Wednesday the bank will be “more selective on client coverage” after incurring losses tied to fixed-income trading positions.

“Everyone is talking about how you go about” boosting profitability, said Greg Braca, head of U.S. corporate and specialty banking at TD Bank. “Banks are going to very much cherish their house accounts and core clients.”
Top payers

At Citigroup, that’s meant catering to the big hedge funds that consistently trade more than anyone else, said the person familiar with the bank’s internal practices. This year, the bank winnowed its favoured list to fewer than a hundred to devote more attention to its top-paying clients and discouraged analysts from spending time on anyone else, the person said. The analysts have quotas to ensure they keep in touch regularly. They must track their progress on a spreadsheet.

To make the cut, firms typically need to generate at least US$2 million annually in equity trading revenue with the bank. Though precise numbers are hard to come by, the “Focus Five” shops may trade multiple times that amount. The hedge-fund firms, which held roughly US$120 billion of U.S. stocks at the end of last year based on filings compiled by Bloomberg, are some of the biggest and most well-known in the business.

‘Focus Five’

They include: Israel Englander’s Millennium, a multi-strategy manager known for making millions of trades a day and picking off tiny profits from each; billionaire Ken Griffin’s Citadel empire, whose market-making business is one of the U.S. stock market’s biggest automated traders; Point72, which oversees the personal fortune of billionaire Steven A. Cohen, who once captivated Wall Street with an almost preternatural knack for reading the markets while running SAC Capital.

Carlson Capital, the Dallas-based hedge fund founded by Clint Carlson, who helped manage the Texas oil fortunes of the famed Bass brothers, and Surveyor, a separate Citadel hedge-fund unit that trades equities across 29 teams, round out the group.

Representatives for the hedge funds declined to comment.

It’s a dog-eat-dog world.

It’s not just equities. Citigroup keeps lists of accounts across its businesses, some ranked by assets, others by trading volume, said another person with knowledge of the bank’s internal practices. The company identifies favoured clients by “platinum,” “gold” and “silver” status. On the credit research desk, a priority list includes BlackRock Inc., Fidelity and Franklin Resources Inc.

At Morgan Stanley, the firm’s European list of “supercore” clients includes BlackRock and Pacific Investment Management Co., the people familiar with the matter said. The bank began analyzing its client base in 2012 and looked at every interaction its sales team had with customers, from instant messages to phone calls and meetings. They found about 75 per cent of revenue came from roughly 25 per cent of clients, the people said.

While providing the top-paying funds with the best service is well within the rules, the various rankings and methodologies highlight just how far banks are willing to go as they shift toward a model that relies exclusively on a small number of clients.

Best service

“If you want to sit down and talk to an analyst or strategist, clearly the biggest clients are the ones that get first cut,” said Voya Investment Management’s Paul Zemsky, referring to prevailing Wall Street practices. The head of multi-asset strategies at Voya helps oversee US$210 billion.

One money manager, who asked not to be identified for fear of reprisals, says she doesn’t even bother calling up top analysts at the major banks. She’s come to understand that her firm doesn’t have the pull to get her calls returned, even though it oversees billions of dollars.

Some say it’s just the reality on Wall Street, where banks are under pressure to restore profitability in a business that’s become increasingly regulated over the past 15 years. That makes favouring their best clients a no-brainer.

“It’s a dog-eat-dog world,” said Kevin Kelly, the chief investment officer at Recon Capital Partners in New York. “It’s tough but that’s just how it works.”

]]>citigroupBloomberg NewsSimon Dawson/Bloomberg How Martin Shkreli, the Teen Wolf of Wall Street, thrivedhttp://business.financialpost.com/news/fp-street/how-martin-shkreli-the-teen-wolf-of-wall-street-thrived/wcm/b0456cf2-7686-4360-a16e-166e0cd7071e
http://business.financialpost.com/news/fp-street/how-martin-shkreli-the-teen-wolf-of-wall-street-thrived/wcm/b0456cf2-7686-4360-a16e-166e0cd7071e#respondMon, 21 Dec 2015 19:16:51 +0000http://business.financialpost.com/?p=616546]]>Ponder for a moment the strange case of Martin Shkreli, the 32-year-old former hedge fund manager who was arrested by the Federal Bureau of Investigation at his Manhattan apartment before dawn on Dec. 17 and charged with securities and wire fraud. Even by the standards of the ego-driven, attention-grabbing, hedge fund industry, Shkreli’s alleged depravity stands out for its audacity and for his ability to keep the con going long after it should have been stopped dead in its tracks.

Shkreli is best known, of course, as the pharmaceutical entrepreneur who bought orphaned, lifesaving drugs and then jacked up their prices to astronomical levels.

But that’s not the behaviour that got him arrested.

Instead, if the FBI, federal prosecutors in Brooklyn and the Securities and Exchange Commission are to be believed, Shkreli had long been pulling off one scheme after another since his first hedge fund, Elea Capital, collapsed after a bad bet in 2007.

In some corners of the business press, however, Shkreli was seen as something else altogether. In December 2012, Forbes named him to its list of “30 under 30 in Finance,” lionizing him as an activist investor best known for “battling billionaires and entrenched drug industry executives” through his various written screeds on social media. (Forbes provided a more critical take earlier this year.) Alan Geller, a former oil trader who invested with Shkreli, called him “a genius,” adding, “I’m betting he’s going to make a billion dollars rather than blow up.”

Earlier this month, Business Insider praised him for “exposing the critical need for balance between the interests of shareholders and patients.”

According to the indictment, the only group that Shkreli held in greater contempt than patients was shareholders. After his first hedge fund collapsed, he started a second, MSMB Capital, which also lost millions, although he assured investors that it was making them lots of money. Trying to obtain more capital, Shkreli told one investor in 2010 that MSMB Capital had assets of $35 million. In fact, it had $700.

In February 2011, he made another bad bet, losing his investors’ money and another $7 million he had effectively borrowed from Merrill Lynch. To settle with Merrill, he used his investors’ money to pay the firm around $1.5 million, then liquidated his fund, telling investors they had “doubled their money,” and that they could get cash or a combination of cash and shares in a new health care company, Retrophin, he had incorporated. He then started a third hedge fund, MSMB Healthcare, and, based on his misrepresentations of his previous performance, induced 13 people to invest $5 million in it. (It was around this time that the approving Forbes article appeared.)

As Shkreli’s Ponzi scheme began to collapse, in 2013 he and Evan Greebel, an accomplice, according to the indictment, used Retrophin stock to pay back his investors even though the drug company had nothing to do with his hedge-fund losses. When Retrophin’s auditors questioned the legitimacy of those payments, Shkreli and Greebel concocted a new scheme to settle with the investors by having Retrophin enter into sham consulting agreements with them. In the end, the indictment alleges, both Shkreli and Greebel “caused” Retrophin to pay out more than $7.6 million in cash and stock to settle the claims.

Elizabeth Williams / The Associated Press

Shkreli did learn one lesson from his hedge fund experience, however: There is no such thing as bad press. He delighted being the “bad boy” of Wall Street by assuming the role of a hipster Gordon Gekko, taunting his adversaries on Twitter, bathing in the adulation of young fans during bizarre online chats, investing in music labels and buying a rare album by the Wu-Tang Clan for $2 million.

After The New York Times reported on Sept. 20 that Shkreli’s new start-up, Turing Pharmaceuticals, had bought the drug Daraprim — used to cure a life-threatening parasitic disease — and then jacked the price of it to US$750 per tablet, from US$13.50, Shkreli was everywhere, defending himself on CNBC, Bloomberg and Fox Business, and delighting in his 15 minutes of fame. He claimed he should have raised the price of Daraprim even higher.

By then, of course, he was already in the cross hairs of the SEC, the FBI. and federal prosecutors. After he pleaded not guilty to the charges of securities fraud and was released on US$5 million bail, he tweeted that he was “glad to be home” and “thanks for the support.” But there hadn’t really been much. Instead, there was just scorn for a man who had apparently duped lots of people into thinking he was something he was not.

Until Shkreli has his day in court, we won’t know for certain whether he should join the company of other con artists like Bernie Madoff.

The bigger question is whether Wall Street writ large will ever be able to reform itself to prevent acts of fraud and deception. There are encouraging signs, including this aggressive prosecution and a two-year campaign by William C. Dudley, the president of the Federal Reserve Bank of New York, to rehabilitate Wall Street by focusing “less on the search for bad apples and more on how to improve the apple barrels.”

]]>http://business.financialpost.com/news/fp-street/how-martin-shkreli-the-teen-wolf-of-wall-street-thrived/wcm/b0456cf2-7686-4360-a16e-166e0cd7071e/feed0shkrelinytimesblogElizabeth Williams / The Associated PressRBC loses bid to overturn US$76 million judgment over sale of ambulance company Rural/Metrohttp://business.financialpost.com/news/fp-street/rbc-loses-bid-to-overturn-us76-million-judgment-over-sale-of-ambulance-company-ruralmetro/wcm/8a429807-ed51-413c-ae8d-84d79a28433c
http://business.financialpost.com/news/fp-street/rbc-loses-bid-to-overturn-us76-million-judgment-over-sale-of-ambulance-company-ruralmetro/wcm/8a429807-ed51-413c-ae8d-84d79a28433c#respondMon, 30 Nov 2015 18:06:04 +0000http://business.financialpost.com/?p=610714]]>The Delaware Supreme Court upheld on Monday a ruling that RBC Capital Markets is liable for US$76 million for its role in the 2011 sale of ambulance company Rural/Metro, which was found to have shortchanged investors.

The case has been closely watched on Wall Street because the 2014 ruling by the lower Court of Chancery exposed financial advisers on merger deals to potential liability for aiding a board that mishandles the sale of a company.

The lower court found RBC was liable for convincing the Rural/Metro board to rush into a US$438 million buyout led by private equity firm Warburg Pincus.
RBC, a unit of Royal Bank of Canada, never disclosed it was also trying to win the more lucrative role of providing financing to Warburg.

“We agree with the trial court that the individual defendants breached their fiduciary duties by engaging in conduct that fell outside the range of reasonableness, and that this was a sufficient predicate for its finding of aiding and abetting liability against RBC,” the court said in its 101-page opinion.

]]>http://business.financialpost.com/news/fp-street/rbc-loses-bid-to-overturn-us76-million-judgment-over-sale-of-ambulance-company-ruralmetro/wcm/8a429807-ed51-413c-ae8d-84d79a28433c/feed0rbcReuters‘Spoiled’ investors losing sense of the risk/return relationshiphttp://business.financialpost.com/investing/investing-pro/spoiled-investors-losing-sense-of-the-riskreturn-relationship/wcm/dd5d2303-9dee-4941-9944-9044e6a565d1
http://business.financialpost.com/investing/investing-pro/spoiled-investors-losing-sense-of-the-riskreturn-relationship/wcm/dd5d2303-9dee-4941-9944-9044e6a565d1#respondMon, 31 Aug 2015 17:50:48 +0000http://business.financialpost.com/?p=585190]]>Investors have for the most part been spoiled by the strong returns generated over the past few years from the broader equity markets, especially by U.S. stocks that have posted double-digit annual gains since the bottom of the financial crisis.

But we fear it has fundamentally changed investors’ understanding of the relationship between risk and return, something all too evident by the dumbfounded reaction to the market correction early last week.

Consequently, it isn’t surprising to see investors herd into what were once considered to be the riskiest asset classes — equities and real estate — finding safety in their almost perpetual linear ascent to new highs.

Consider this, according to Bloomberg Business, the average Wall Street trader is 30 years old and has never seen a rate hike or a sizable market correction.

Compounding matters is that higher returns are no longer associated with higher rates of inflation. For example, interest rates have a remained near zero for seven years now and yet market participants have sent commodity prices to 13-year lows, indicating we are in a deflationary environment.

This makes it very difficult to determine a realistic long-term return objective, since it is human nature to increase one’s willingness to take on risk when markets are setting new highs, and vice versa when they are setting new lows.

Funds flow data show how investors pile into funds with the highest recent returns while selling those markets or sectors that have recently been underperforming.

This behaviour creates a major headache for most investment managers given that they have to outperform a particular benchmark, such as an equity market index, or face redemptions. As a result, they can be highly incentivized at times to take on excessive risk to try to play catch-up.

On the other hand, some managers target a rate of return either in nominal or real (inflation adjusted) terms that is separate from the market and/or what others are doing.

it is human nature to increase one’s willingness to take on risk when markets are setting new highs

The benefit of setting an independent return is that it allows the manager and/or investor to also focus on mitigating the level of risk a portfolio is taking on at the same time — essentially removing the dangers of return chasing.

Sizable corrections such as the one on August 24 also provide a great chance to check in with your investment manager and determine the level of risk being taken in your portfolio.

Simply ask for your portfolio’s standard deviation and return profile during the past few months and compare it to a simple passive index, especially if you are undertaking an alpha strategy or paying the manager to outperform the market.

For example, a typical portfolio with a 70-per-cent long equity position would normally correct seven per cent or more in a 10-per-cent broader market correction, assuming the manager is no better or worse than the index and that bonds stay flat.

One would expect a much lower downside for absolute return managers, so this is also a great time to double check and confirm if any risk-management strategies are being deployed and actually working as promised.

Warren Buffett just can’t walk away from a big deal, can he? Copper — you know, the metal with the PhD in economics, is still in the dumps. Greece says it hopes to have a bailout deal on Tuesday. And this time they really, really mean it.

1. Warren Buffett makes one of his biggest deals ever

Bill Pugliano/Getty Images

Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Precision Castparts Corp., the maker of equipment for the aerospace and energy industries, in a deal valued at $37.2 billion.

Berkshire is one of Precision Castparts’ largest shareholders, with a roughly 3 per cent stake worth US$882 million as of March 31, according to securities filings.

Prices for the metal, used in everything from homes to cars, are stuck in the worst slump in more than two years.

Stockpiles jumped 11 per cent in Shanghai last week, a sign that China’s economy is slowing.

That’s bad news for copper prices, because China accounts for about 40 per cent of global demand.

3. Greece hopes to conclude bailout talks on Tuesday

ARIS MESSINIS/AFP/Getty Images

It feels like this story never ends.

The latest out of Greece is that the country hopes to conclude negotiations with international creditors by early Tuesday, a Greek official told Reuters.

Greece’s finance and economy ministers were locked in negotiations with representatives of creditors on Sunday. Greek officials have previously said they expect the bailout accord to go to the country’s parliament for approval by Aug. 18.

And no doubt this time they really, really mean it.

4. Business disruption continues to shake things up everywhere

Drew Hasselback/National Post

Nowhere in the world has more accommodation available on Airbnb than Paris. This is spooking high class hotels in the City of Lights.

“The Paris market is going to get very difficult,” said Didier le Calvez, managing director of the Bristol Hotel, told Reuters.

A trawl of the Paris region’s 50,000 Airbnb offerings — there were only 7,000 across the whole of France in 2012 — suggests le Calvez and his colleagues have reason to worry.

Airbnb offers between 380 and 400 Paris properties at over 500 euros a night. Of those, about 40 charge over 1,000 euros (US$1,090).

5. Wall Street types do weird and complicated things for fun

Wall Street people seem to have more fun today than they did back in 1987

Employees of Pine River Capital Management were first to reach the finish line of Midnight Madness, Wall Street’s most elaborate charity scavenger hunt, Bloomberg reports.

And to pull off the win, they had to read sheet music composed of grapes and baloney, reverse engineer a Scrabble board and convert parking signs into binary code. You know, the usual stuff people do for fun.

The contest lured 21 teams from banks and financial firms. Proceeds from the event go to charity.